It’s time to scrap the 4% rule, say retirement pros
According to Lau, Stone and Blanchett, the 4% withdrawal rule is about as likely to cause overspending as it is to cause underspending for any given retiree. The actual sustainable level of spending will depend on a myriad of factors, from the sequence of market returns to the expected lifestyle in retirement.
The trio agree that consideration of clients’ tolerance for income risk and their desire for security should begin well before retirement begins, with planning that considers both their financial and emotional needs. Something like the 4% rule, which relies on full market participation with no asset rents, can work very well for a client who has excess assets and a high appetite for risk.
“For clients who have sufficient assets and can handle market volatility without making fear or emotion-based trading errors, a probability-based total return strategy that draws retirement income directly portfolio may be the right approach,” says Blanchett.
On the other hand, for those who are not comfortable exiting the markets, incorporating a guaranteed income element into the overall plan in the form of an annuity can help alleviate many of the fears. expressed by customers.
“That’s going to be a lot more productive for a retirement income plan than just seeing the person make the money,” Lau points out.
According to Stone, Lau and Blanchett, recent developments in the annuity market have completely reshaped the suite of solutions that is available to advisors and their clients. While traditional single premium immediate annuities, or “SPIAs”, continue to generate income through a true annuity, it is now much more common for income to be generated through riders.
That means many annuity products offer a lot more flexibility than advisors and clients often assume, Lau says.
“It’s important because customers don’t hand over assets to the insurance company to generate revenue,” Lau explains. “When income is generated using a rider, the cash value remains in the portfolio until it is depleted by distributions.”
Stone says this development is extremely important for advisors to understand because it addresses the most common point of hesitation clients cite when they refuse to consider annuities as part of their retirement income planning efforts. . What’s more, Stone says, the widespread shift from commission-based activities to fee-based trustee work is also helping to reshape the revenue landscape.
Overall, panelists agree it’s time to retire the 4% withdrawal rule as an income plan. The data will remain useful, they agree, but advisers need to step up their game.